Good News on Revenue: A Look at the Independent Fiscal Office's Estimate

April Revenue Update

Pennsylvania’s Independent Fiscal Office (IFO) released its revenue estimate this week, offering a more upbeat view of the economy moving forward. The official revenue estimate predicts a smaller revenue shortfall for the current year and more robust revenue collections for 2012-13.

The IFO estimate leaves the General Assembly with as much as $800 million available to restore cuts proposed by the Governor. This is clearly good news, but both the Corbett administration and legislative leaders are already dampening expectations about the scale of funding restorations.

A Look at the Numbers

In the current 2011-12 fiscal year, the Corbett budget pegged revenue at $27.1 billion, with a revenue shortfall of $719 million. The IFO estimates revenue collections will be $419 million higher, at $27.5 billion and a shortfall of $300 million for the fiscal year. With $700 million in current-year reserves, this leaves an actual year-end surplus of around $400 million.

In the 2012-13 fiscal year, the IFO predicts revenue at $28.7 billion. This is approximately $404 million higher than the Corbett budget (this figure includes $142 million in new revenue sources proposed by the Governor in his budget plan; the IFO, however, excludes those new revenue sources since they have not yet been enacted).

State lawmakers have been careful so far not to set a hard “spend number” for 2012-13, leaving some wiggle room to increase total spending. This is a welcome departure from the past few years when the Senate or the Governor set a target spending number and stubbornly held to it throughout budget negotiations. With revenues improving in the second half of the fiscal year, lawmakers want to see if they can make the 2012-13 budget less damaging.

Just what will $800 million in additional revenue get us in the budget?

$168 million for the Human Services Development Fund

$238 million for Higher Education

$159 million for General Assistance Grants

$100 million for Accountability Block Grants (which funds full-day kindergarten and other early childhood programs)

$135 million for the Basic Education Subsidy or Long-Term Care (to help restore research funding out of the Tobacco Settlement fund)

Too Good to Be True?

There are a few obstacles to be overcome. The Legislature is required by law to send 25% of any year-end surplus to the state’s Rainy Day fund. Although lawmakers ignored this rule last year, we are likely to see some amount go into the bank this year — and that’s a good thing for Pennsylvania over the long term.

Revenue Secretary Dan Meuser, in responding to the revenue news, urged caution in light of economic uncertainty and fiscal pressures. Senate President Joe Scarnati pointed out the need to think in terms of longer-term fiscal pressures, and House Appropriations Chairman Bill Adolph said through a spokesman that the House would not support spending that is “unsustainable.”

There is much competition for the additional revenue. Hospitals and nursing homes have sustained cuts, and there is pressure to restore some of the Tobacco Settlement research funding that has been shifted into the Long-term Care program.

The IFO estimate did not consider the Governor’s proposals to cap the sales tax vendor discount or transfer money from the Keystone Recreation, Park and Conservation Fund to the General Fund. This is good news and bad news: adopting the vendor discount cap will raise $41 million more to restore service cuts, but the Keystone Fund transfer is a big concern for environmentalists.

The Bottom Line

Improving revenues means there is a real opportunity to see a restoration of some of the Governor’s most controversial and draconian cuts. It will take a lot of work to push the Governor and Legislature to set a spending number that allows for significant restoration. We have our work cut out for us.